Real estate lenders expect to encounter downside risk in the coming 12 months, including some slowing of momentum in Europe’s economic growth, the effects of the end of quantitative easing and rising geopolitical risk.
The new year, however, is also expected to bring new financing opportunities arising from core investments in global cities and increased demand for niche properties. Below are the topics industry players expect to be crucial in 2019:
A turning point in monetary policy
The European Central Bank ended its quantitative easing programme at the end of 2018, having bought more than €2.56 trillion of bonds in almost four years. As the ECB starts to take the foot off the accelerator of monetary policy, a rate hike is expected in 2019.
According to CBRE’s 2019 outlook, property yields not always correlate directly to interest rates, as there are additional factors at play, such as availability of equity, lending margins and future income growth expectations. So far, the cost of capital is low by historical standards, occupier market fundamentals are generally strong and demand outweighs supply in several markets in Continental Europe. Considering the turning point in the ECB’s monetary policy, however, property investors will take a more cautious attitude in 2019 and lenders will see a moderate decline in property investment compared with 2018.
Weaker growth in Europe
The European economy is growing at a rate above its 15-year average, but in 2018 it failed to maintain the momentum built in 2017, according to CBRE. GDP growth for Western and Central Europe is likely to reach 2 percent in 2018, which is down on the 2.5 percent recorded in 2017, CBRE says. Several factors contributed to this year-on-year slowdown: in Germany, the economy was hit by disruption to the automotive sector and the impact of an appreciating euro; France saw consumer tax increases; and Brexit-related uncertainty intensified in the UK. Economic growth in Europe over the next two years looks much like 2018; above trend but weaker than 2017. Property lenders, however, will see in Spain, Ireland and CEE countries Europe’s fastest rates of growth.
Political risks are more likely to materialise
In the past few years, political risk did not have a substantial impact on real estate, as a relatively robust period of economic growth coincided with low interest rates, supporting asset values. Political noise in 2019, however, may finally bring about more tangible consequences for real estate markets according to UBS, due to several events. The ongoing US-China trade dispute is likely to have some negative impact on global economic growth and, indirectly, on the property market. In Italy, the direction of the coalition government is spooking investors, and in the UK a no-deal Brexit scenario would have direct consequences for real estate markets.
Strong investment in core assets and global cities
With risks triggered by Brexit, the rise of populism and the Trump trade war, investors will continue to favour core assets, which allow them to collect income regardless of the next pricing shock, UBS notes. At the same time, global cities and well-located land will attract strong investment flows in 2019, as demand is increasing for warehouses, data centres, student accommodation and flexible office space, according to Schroders. CBRE notes the capacity of city economies to outgrow their national growth rates. Over the past five years, the combined GDP growth of the capital cities of the UK, France, Germany, Italy, Spain, Sweden, the Netherlands and Ireland has been 2.2 percent, which compares favourably with the 1.6 percent achieved by the sum of the countries concerned.
More popularity for niche property types
Lenders should keep a close eye on niche property assets, which are receiving increased attention from investors. UBS is confident to “almost guarantee” that novel investment themes and sectors will be a mainstay in 2019, as yield-hungry investors look for relatively attractive returns. Higher flows from institutional investors into assets such as centres or senior housing are expected this year, as structural changes in technology and demographics continue to impact real estate uses.